Question

A manufacturer uses activity-based costing to assign overhead costs to products. Budgeted cost information for selected activities for next year follows. Form two cost pools and compute activity rates for each of the cost pools.

Activity	Expected Cost	Cost Driver	Expected Usage of Cost Driver
Purchasing	$135,000	Purchase orders	4,500 purchase orders
Cleaning factory	32,000	Square feet	5,000 square feet
Providing utilities	65,000	Square feet	5,000 square feet

Short answer

• Purchasing = $30 per purchase order
• Factory = $19.4 per square feet

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Activity cost driver

An activity cost driver is a cost-generating factor.In other words, activity cost drivers are elements such as activity level and volumethat raise or create cost.

Calculating activity rates for each of the cost pools

Activity Cost pool	Expected costs	The expected amount of cost driver	Activity Overhead rate	Rate
Purchasing	$135,000	4,500	$\frac{\$135,000}{4,500}=\$30$	Per purchase order
Factory	$97,000 $\left(\$32,000+\$65,000\right)$	5,000	$\frac{\$97,000}{5,000}=\$19.4$	Per square feet